First Industrial Realty Trust Inc

NYSE:FR

Earnings Call Analysis

Q2 Gains Drive Uplift in 2024 Forecast Amid Leasing Wins

In Q2, First Industrial Realty Trust saw NAREIT funds from operations rise to $0.66 per share, up from $0.61 in Q2 2023. The company achieved significant leasing success, including 2.9 million square feet of new and renewal leases. This led to stronger 2024 guidance, with funds from operations now expected between $2.59 and $2.67 per share. Development projects in South Florida and Houston, with yields around 7%, and asset sales totaling $138 million are set to support cash flow growth into 2025. Occupancy is anticipated to reach up to 96.75%, with same-store NOI growth projected at 7.25%-8.25%.

Leasing Achievements and Market Trends

In 2024, the company focused on securing substantial leasing deals and achieved significant progress. The industrial market fundamentals showed signs of improvement with a national vacancy rate rising slightly to 5.7%. Demand increased as more tenant requirements converted into leased spaces. The company successfully leased 1.1 million square feet in various strategic locations, including Southern California and South Florida.

Financial Performance Highlights

The financial performance for the quarter showcased the company's robust position with NAREIT funds from operations (FFO) reaching $0.66 per share, an increase from $0.61 per share in the second quarter of the previous year. The same-store net operating income (NOI) grew by 5.6%, primarily driven by higher rental rates on renewals and new leases. The company maintained a high occupancy rate of 95.3%, indicating a stable income stream.

Updated 2024 Guidance

The updated guidance for 2024 set FFO at a range of $2.59 to $2.67 per share, up by $0.03 at the midpoint from previous estimates. This adjustment reflects the progress in leasing, particularly for speculative developments. Key assumptions for the guidance included maintaining an average occupancy rate of 95.75% to 96.75% and projecting same-store NOI growth to be between 7.25% and 8.25%. General and administrative expenses were anticipated to be between $39.5 million and $40.5 million, including $3 million in accelerated expenses.

Strategic Developments and Investments

The company initiated three new development projects in the second quarter, including significant investments in South Florida and Houston. The South Florida developments are expected to yield approximately 7%, highlighting the region’s strong market performance. Additionally, the company sold $90 million worth of properties, bringing the year-to-date total to $138 million. This strategic disposition aligns with the company’s plan to optimize its portfolio and reallocate capital to high-yield projects.

Future Outlook and Opportunities

Looking forward, the company remains optimistic about continued growth and leasing successes. It is already making progress with early lease renewals for 2025, including the renewal of a 1.3 million square foot property in Pennsylvania. The company plans to start more projects if current leasing trends sustain, particularly in high-demand markets like South Florida, Nashville, and Northwest Dallas. This strategic focus on robust markets positions the company well for future cash flow growth and portfolio enhancement.

Earnings Call Transcript 2024-Q2

[Operator]

Good day, and welcome to the First Industrial Realty Trust, Inc. Second Quarter Results Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Art Harmon, Senior Vice President of Investor Relations and Marketing. Please go ahead.

[Art Harmon, executive]

Thank you very much, Dave. Hello, everybody, and welcome to our call. Before we discuss our second quarter results and our updated guidance for the year, let me remind everyone that our call may include forward-looking statements as defined by federal securities laws. These statements are based on management's expectations, plans and estimates of our prospects.

Today's statements may be time sensitive and accurate only as of today's date, July 18, 2024. We assume no obligation to update our statements or the other information we provide. Actual results may differ materially from our forward-looking statements and factors which could cause this are described in our 10-K and other SEC filings. You can find a reconciliation of non-GAAP financial measures discussed in today's call in our supplemental report and our earnings release. The supplemental report, earnings release and our SEC filings are available at firstindustrial.com under the Investors tab.

Our call will begin with remarks by Peter Baccile, our President and Chief Executive Officer; and Scott Musil, Chief Financial Officer, after which we'll open it up for your questions. Also with us today are Jojo Yap, Chief Investment Officer; Peter Schultz, Executive Vice President; Chris Schneider, Executive Vice President of Operations; and Bob Walter, Executive Vice President of Capital Markets and Asset Management.

Now let me hand the call over to Peter.

[Peter Baccile, executive]

Thank you, Art, and thank you all for joining us today. As we discussed on our last earnings call, 2024 is all about leasing. Since that call, our team has delivered some big leasing wins, both in our core portfolio and within our development projects. We're also excited to discuss the 3 new development starts that we kicked off in the second quarter. More on all of this shortly.

Looking at the industrial market broadly, fundamentals are slowly improving, although as expected, U.S. industrial market vacancy ticked up by 40 basis points to 5.7% as last year's starts continue to come online. New starts remain disciplined, totaling 50 million square feet in the second quarter, down 55% from the peak in the third quarter of 2022. With respect to demand, the market saw an uptick in tenant requirements being converted into leased spaces. Year-to-date net absorption nationally was 70 million square feet with 48 million within our target markets. As the pace of demand continues to improve and new starts remain muted, we could see slower increases in vacancy near term and potential declines in 2025.

Turning now to our leasing wins. For 2024, we're now through 88% of our expirations by net rent with a cash run rate change of 45%. This population now includes the renewal of the 221,000 square footer in the Inland Empire West we spoke about on prior earnings calls. Our 2024 guidance range for the increase in cash rental rates on new and renewal leasing remains 40% to 52%. The lease extension for the other significant Inland Empire West rollover, the 300,000 square footer is still in progress.

Note that the midpoint of our FFO and cash same-store NOI guidance do not include any benefit from this potential renewal. We're also beginning to see some early decision-making on our 2025 lease expirations. I'm pleased to report that we recently inked the renewal of our largest 2025 expiration, a 1.3 million square footer in Pennsylvania. We'll provide you an update on our progress for next year's rollovers on our third quarter call as we had done in prior years, but we're off to a strong start.

As I mentioned at the beginning of my remarks, in the second quarter and third quarter to date, we signed 6 speculative development leases across several markets including Southern California, which totaled approximately 1.1 million square feet. This is almost half of the 2.3 million square feet of speculative development leasing that was included in our updated 2024 FFO guidance provided on our first quarter call in April.

In the third quarter, we inked a full building lease for our 461,000 square foot first pioneer project in the Inland Empire East to a 3PL. We also just signed a 61,000 square foot lease at our first 76 project in Denver. In the second quarter, we signed a lease for the entire 359,000 square foot first day crossing project in the Philadelphia airport market to a leading food and beverage company. We also leased the remaining 64,000 square feet at our first steel asset in Seattle and a 120,000 square feet at First Park 94 in the Kenosha submarket of Chicago.

In South Florida, at First Park Miami Building 12 that we just completed in the second quarter, we've already leased 1/3 of the 136,000 square foot building. The South Florida market continues to outperform, and given our success there, we are starting 2 new projects. The First Park Miami Building 3 is now underway. This is the latest phase of the 13 building 2.5 million square foot park where since 2021, we have successfully leased and placed in service 1.1 million square feet of building that on average, leased up well within our pro forma.

Building 3 will be a 198,000 square footer to serve 1 or multiple customers, and the total investment is estimated at $50 million. In a highly infill location in Pompano Beach and Broward County, we started at 60,000 square footer with an estimated investment of $15 million. The site is located directly between I-95 and the Florida Turnpike, an attractive location for businesses serving the Tri-County area of Broward, Palm Beach and Miami-Dade. Our combined estimated yield on these 2 South Florida projects is approximately 7%.

We're also starting a 425,000 square foot development in the Northeast side of Houston at our infill site with frontage on Interstate 610, the first loop beltway. Total investment is expected to be approximately $44 million with a cash yield of 7%. Prior to beginning construction, we inked the lease for 50% of this building. Moving to dispositions in the second quarter and third quarter to date, we sold an incremental $90 million of assets to bring our year-to-date total to $138 million.

With that, I'll turn it over to Scott.

[Scott Musil, executive]

Thanks, Peter. Let me recap our results for the quarter. NAREIT funds from operations were $0.66 per fully diluted share compared to $0.61 per share in 2Q 2023. Our cash same-store NOI growth for the quarter, excluding termination fees, was 5.6%. The results in the quarter were primarily driven by increases in rental rates on new and renewal leasing, rental rate bumps embedded in our leases and lower free rent, partially offset by lower average occupancy.

We finished the quarter with in-service occupancy of 95.3%, and we have approximately 200 basis points of opportunity from developments placed in service in 2023 and 2024. Summarizing our leasing activity during the quarter, approximately 2.9 million square feet of leases commenced; of these, 500,000 were new, 1.2 million were renewals and 1.2 million were for developments and acquisitions with lease-up.

Before I touch on guidance, let me remind you that on the capital front, we are strongly positioned with no debt maturities until 2026, assuming the exercise of extension options in 2 of our bank loans. Also, the incremental funding required to complete our current development projects will be covered by our third quarter sales proceeds to date and our projected excess cash flow after dividends and capital expenditures during the construction period.

Moving on to our updated 2024 guidance for our earnings release last evening. Our guidance range for FFO is now $2.59 to $2.67 per share, which is $0.03 higher at the midpoint than our prior guidance. This is primarily due to the progress we have made in leasing up our development since last quarter's earnings call. Note as we detailed on our fourth quarter earnings call, our guidance excludes approximately $0.02 per share of accelerated expense related to an accounting rule that requires us to fully expense the value of granted equity-based compensation for certain tenured employees. Including this $0.02 per share of expense, our NAREIT FFO guidance range is $2.57 to $2.65 per share.

Key assumptions for guidance, all of which are unchanged since our last earnings call are as follows: quarter-end average occupancy of 95.75% to 96.75%, same-store NOI growth on a cash basis before termination fees of 7.25% to 8.25%, primarily driven by increases in rental rates on new and renewal leasing, along with rental rate bumps embedded in our leases.

Note that the same-store calculation excludes the 2023 onetime tenant reimbursement that we previously disclosed. Guidance includes the anticipated 2024 costs related to our completed and under construction developments at June 30. For the full year 2024, we expect to capitalize about $0.05 per share of interest. Our G&A expense guidance range is $39.5 million to $40.5 million. This includes the roughly $3 million or $0.02 per share in accelerated expense I referred to earlier. Lastly, guidance does not reflect the impact of any future sales, acquisitions, development starts, debt issuances, debt repurchases or payments nor the potential issuance of equity after this call.

Let me turn it back over to Peter.

[Peter Baccile, executive]

Thanks, Scott. Congratulations again to our team for several significant leasing wins since our first quarter earnings call. With the development leasing progress we have achieved, we're excited to allocate incremental capital to our South Florida portfolio as well as our new Houston project, which is already 50% leased. Our team is steadfastly focused on delivering on the remaining development leasing opportunities in our portfolio which will contribute to our cash flow growth in 2025 and beyond.

Operator, with that, we're ready to open up for questions.

[Art Harmon, executive]

Dave?

[Operator]

[Operator Instructions] Our first question comes from Rob Stevenson with Janney.

[Robert Stevenson, analyst]

You sold $90 million of properties recently. Can you talk about the health of the disposition market today versus last year, given that we still yet to see any rate cuts in the banks that become more conservative on lending on industrial in 2024 to some of these potential buyers of your dispositions?

[Peter Baccile, executive]

Yes. I mean we -- on the assets that we're bringing to market, we're getting a significant number of NDAs and a significant number of bids. So there's a lot of capital out there. Remember that the assets that we're selling are most appealing to local buyers, users and the 1031 buyers are back. So there's significant capital searching for new opportunities to invest in this space.

[Robert Stevenson, analyst]

Okay. And then, Scott, the 200 basis points of occupancy upside from leasing the second half '23 and first half '24 developments that you guys talked about in the release. Is that inclusive of the leasing that you've announced in the release and on the call today? Or is that in addition to those announced leases?

[Scott Musil, executive]

That's in addition to that, Rob. So it's the 1.2 million square feet of development that we still have in our guidance for 2024, all assumed to happen in the fourth quarter.

[Robert Stevenson, analyst]

Okay. And then what is the difference yield-wise today for you guys leasing an asset on a multi-tenant basis versus a single-tenant basis? Is that material?

[Peter Schultz, executive]

Rob, it's Peter Schultz. I would say it depends on market and asset. In some cases, it would be a little bit better, but not a wide margin today. Jojo, anything you want to add to that?

[Johannson Yap, executive]

Yes. I would agree. And then to the extent that the tenants get smaller, there's a little bit higher rent, but then you have to offset that with the increased [indiscernible] costs. So overall, just like Peter said, it's not a material difference.

[Operator]

The next question comes from Craig Mailman with Citi.

[Craig Mailman, analyst]

Just, Peter, I want to circle back up on your commentary that demand is starting to at least get a little bit better here and put that in the context of the 1.1 million square feet of development leasing you guys have done since 2Q. I mean as you look at those deals, what was the mix of deals that had been in the works for a couple of quarters versus maybe some that popped up more recently because people are trying to start to make decisions at this point.

[Peter Baccile, executive]

Yes. Yes. So good question. We have seen a good mix of both I'll say, longer-term gestation period and shorter gestation periods. The larger deals won't surprise you, have been in discussion for a while. That continues to be the case across the board, across the country that those deals take longer to do. We have the examples of the shorter gestation period, the lease we signed in Denver, the lease we signed in our recently completed building at First Park Miami. Those were not prospects in Q1. So those came and got done within the second quarter. Another good example is the partial build-to-suit in Houston. The gestation period on that was about 3 months. So I guess you -- when you look at this, you would say that for smaller deals, that time frame is a little bit shorter. And for the larger deals, as has been the case for several quarters now, those are taking longer.

[Craig Mailman, analyst]

That's helpful. And then the first pioneer lease to the 3PL, that's been a tenant segment that's been a little bit slower there. Can you just talk a little bit about that tenant, their needs and just in terms of kind of the final returns on that, given concessions rise in that market. Was it materially different than what you guys had underwritten? Or was it -- or just any detail, that would be helpful?

[Peter Baccile, executive]

Jojo, do you want to take that?

[Johannson Yap, executive]

Sure. Thank you. So overall, this is a 3PL that has business in both the U.S. and Canada, and this is a -- this market was a growth market, and this was a gross need for our 461st pioneer. Basically, the need was to establish a state-of-the-art facility that has VNA technology are Very Narrow Aisle and some robotics with a lot of green kind of initiatives. So that's basically the need. Our facility perfectly fit that, and that was why our facility was chosen. In terms of yield, it exceeded -- the rents here exceeded our original underwriting. And I will not quote you the exact yield, but I would tell you is in the low to mid-7 yields with -- which basically creates a lot of value.

[Craig Mailman, analyst]

That's helpful. And then just one more to slip in here. The 1.3 million square foot renewal in PA, I know you guys aren't giving a ton of details, but is the spread on that consistent of where you guys have signed the average in '24? Or is that materially different?

[Peter Schultz, executive]

Craig, it's Peter Schultz. You're right. We have a confidentiality agreement with that tenant. So we're not able to disclose much information. I will tell you that they exercised a fixed rate renewal option that was negotiated in the second half of 2017.

[Operator]

And the next question comes from Ki Bin Kim with Truist.

[Ki Bin Kim, analyst]

Could you start off by commenting on what you're seeing from a leasing demand standpoint, the improvement you're seeing? I know you mentioned some of it. I was just curious about the sustainability of that. And the pickup in leasing, congrats on it, was it back-end weighted in the quarter? Because, Peter, I know you have a good poker face, but I didn't get the sense that there was this much activity from our kind of last NAREIT meeting.

[Peter Baccile, executive]

I'll start with this and then Peter and Jojo should chime in. Look, obviously, as we achieved some progress here with leasing, the data become more clear. Decision-making on the whole still remains fairly deliberate. It's still early to determine the resiliency and the pace of demand even though we see today, indicators are pointing in the right direction. So we would suggest not to draw potentially long-term conclusions from one quarter of activity. But we can say that things are feeling a little bit better. Peter, do you want to add to that?

[Peter Schultz, executive]

Ki Bin, I would just add that we're seeing more inquiries, more inspections, more RFPs, and as we've talked about now in the answer to a couple of questions, notably, we were pleased with the decision-making timing of several deals that we've just announced in our development deals, where, as Peter said, the larger deals continue to move slower. And that hasn't changed, and we don't really see any indication that it will change. But it's a little bit more buoyant than it was earlier in the year.

[Peter Baccile, executive]

Let me say one more thing on this. There are still several alternatives to each space for the prospects that are available. And until that changes, the sense of urgency and the deliberate pace aren't going to change. And having said that, the national pipeline is down to about 289 million square feet from a high of over 600 million. So we're getting there. And hopefully, net absorption will continue to improve as the year goes on.

[Ki Bin Kim, analyst]

Okay. And in terms of the acquisition market, what does the opportunities look like for you in pricing. I know you bought a small deal in L.A. this quarter had a good yield. I was also curious how you might compare some potential yields that you might get on acquisitions versus development yields you're getting?

[Peter Baccile, executive]

Jojo?

[Johannson Yap, executive]

The market, Ki Bi, remain to be competitive. There's a lot of buyers, both in one-off assets acquisitions and even land for development and across most markets, capital is abundant. There is actually a more active investment pace now compared to Q1 and definitely compared to Q4 of last year. So the investors are back. The -- we're very pleased with the acquisition we did in a divergent submarket of L.A., it is one of the tightest markets there with abundant power. And -- but the way we got that was -- is an off-market deal. We actually closed the deal with this large tire manufacturer, and they enjoyed doing business with us. And then that led to another piece of property that we ended up transacting with them. It did not hit the market.

[Operator]

The next question comes from Nick Thillman with Baird.

[Nicholas Thillman, analyst]

I wanted to go back to development and kind of just touch on the activity you're seeing on the space that remains to be leased. Any material change here? It sounds as though activity is a little bit better. And then have you changed kind of the concessions you're willing to offer on lease up here?

[Peter Baccile, executive]

Pete, do you want to start with that one?

[Peter Schultz, executive]

Sure. So let's talk about Denver first. We have our largest building there, 588,000 square feet. We continue to see activity from partial and full building users, I would say, more activity with full building users at this time. The supply picture has improved in Denver. The competitive set has been reduced by half for that building as a result of a large 3PL leasing in 1 million feet and a corporate occupier putting a building under contract to buy. So that's certainly a good backdrop for decision-making there. As we've talked about, the larger deals have been moving slower for a number of reasons, including that they have more choices. So fewer choices is a good thing.

The smaller building endeavor, we continue to see pretty good activity. We're pleased with the lease we just did that got done start to finish from when we first started discussions with that tenant in less than 90 days. So that was a good indication of some urgency. In Pennsylvania, the building that we put into service at 50% occupied. We're in discussions with a prospect for the balance of that building. And then in Orlando, the fourth building in our first loop project, we have some activity there. We'd like to see a little bit more. Jojo?

[Johannson Yap, executive]

Yes. Just on renewal activity, we have been most active in IE on renewal activity, it has not materially changed a lot, like Peter Baccile has mentioned, there are some options. So the market is competitive, but we're very, very pleased about the renewal rates that we got, not much change in free rent or TIs. And as you know, we leased the first pioneer that was done current market terms, long term with market TIs and market free rent. I would say that if you look at activity, the only development that we have constructed in '23 in the SoCal market that's not been leased is our 83,000 floater that is a low coverage site in Inland Empire West. And that kind of facility right now is somewhat slow because it has a lot of surface use. So we expect when the port activity grows more in the future, I think that would be an asset that everybody would be interested in taking. And then it's still -- we just finished the other buildings in SoCal, and we're early in the process. And like we said, we budget 1-year lease-up on those and we just completed those.

[Nicholas Thillman, analyst]

That's helpful. And then going back to dispositions, kind of what you've completed year-to-date, you're kind of near the upper end of the range for this year. Is there more opportunity there? Or should we kind of just view it as you're well funded anything else kind of being noncore sort of sales?

[Peter Baccile, executive]

I think you're correct. We've got plenty of funding and we'll continue to dispose off assets where we think the growth opportunity is and after that we can take that capital and redeploy it in better use the volume of sales is likely to be lower going forward.

[Operator]

The next question comes from Rich Anderson with Wedbush.

[Richard Anderson, analyst]

Question on market rents versus cash releasing spreads. I don't know if you mentioned what you're seeing nationally or in your portfolio in terms of market, let's say the number is flat or up a bit or down a bit. And you have 40%, 50% cash releasing spreads. At what point do you think we get to a situation where because of that sort of imbalance in those numbers that we get closer to a cash releasing spread that's more pedestrian in nature, more like a 10 percentage number. Does that happen based on that math anytime soon?

[Peter Baccile, executive]

We've looked at that and the resilience of that mark is pretty good. So it has some duration. Obviously, it depends solely on whether rents you call them flattish, let's go with that. If they were to fall significantly, then the resiliency of that mark goes away. But under what you might say 1 or 2 derivatives analysis that mark has some resiliency. It will clearly come down each year because we're not growing like we were in '21 and '22.

[Richard Anderson, analyst]

Okay. Fair enough. And then in terms of your conversations with tenants, I would say, election year could very easily hear more conversation around tariffs and whatnot depending on who wins. What is -- how does that play into, a, the mindset of your tenants, and b, in the mindset of you guys in terms of does that become an opportunity? Or does it create disruption, like where are you at on sort of the political landscape in '25 and beyond?

[Peter Baccile, executive]

Yes. I think, obviously, the biggest question around that is the tariff question. Interestingly, both candidates are -- for tariffs seems that Trump is for much higher tariffs. Tariffs generally aren't going to be great for the country as they create a ton of inflation, but getting more specific to our space and our prospects, the tariff rates right now are on an increasing on semiconductors, EVs, lithium batteries, solar cells, ship-to-shore cranes, things like that. Those are not the kind of products that generate demand for our warehouses. Toys, furniture, that's a different conversation. That product is in our -- in our peers' warehouses. So it really -- a lot of the discussion is around manufacturing. We don't have manufacturing tenants by and large. We don't want to have manufacturing tenants. So we'll see where this goes. Clearly, the management and the economy is key to our prospects and key to consumption. So we'll see.

[Richard Anderson, analyst]

But you may not want manufacturing, but suppliers to those manufacturers, you might think that this could push for more of a near shoring, reshoring type of phenomenon. Is that a fair statement?

[Peter Baccile, executive]

Yes, correct. Yes, it is. And those vendors for those manufacturers would be our tenants. And depending on where the near shoring is and right now, it looks like Mexico by and large, that's going to help markets in Dallas, Houston and depending where in Mexico, maybe even Phoenix. So that would be a tailwind to demand for us.

[Richard Anderson, analyst]

And just to follow up, the tenants concerned about this, talking to you about it, anything of any -- at any level at this point in terms of your conversations?

[Peter Baccile, executive]

Again, not really, no, because we're not really spending a lot of time with the manufacturing tenants.

[Operator]

Next question comes from Caitlin Burrows with Goldman Sachs.

[Caitlin Burrows, analyst]

Maybe on the development side, I think you guys talked about it and it shows in the supplement 7% yield on the in-process developments, including the new Florida One. So I guess as you guys think about what makes sense going forward, where rates are, where your costs are? What kind of yields do you think you need in order for projects today to pencil?

[Peter Baccile, executive]

That's going to depend on where it is and the size and the growth prospects were a total return investor, so yields could be lower, where growth is going to be higher. But generally speaking, we're going to want to get a 6 handle on our developments at a minimum and a 8, 8.5 IRR.

[Caitlin Burrows, analyst]

Got it. Okay. And then on -- I think when I asked about it in the past on future starts. You talked about that they could happen in Florida, which we've now seen. So going forward, do you think there could be additional starts in the second half? Or again, what would it take for you to start more projects?

[Peter Baccile, executive]

I mean we've had a bit of an improvement here in the second quarter, and that's great. We want to see that this improvement is sustainable. Clearly, more development leasing. Now we came into the year with 4.7 million square feet of developments whether they were in process, completed or completed in service and on lease. We've leased 2.6 million and that is 56%. That looks good, that's encouraging. But we want to make sure that, that tempo is sustainable. And if it is, then we will absolutely engage in new starts with some of the other land holdings we have in places like South Florida and Nashville and Northwest Dallas.

[Caitlin Burrows, analyst]

Got it. And maybe one other quick one. On the development leases that you signed in the second quarter, do you have any overarching comments on what you think drove those decisions, whether it was combining locations, splitting existing locations, just the business growing or anything like that.

[Peter Baccile, executive]

Do you want to talk about it?

[Peter Schultz, executive]

Sure. Caitlin, it's Peter Schultz. Several of them were processing and fulfillment and upgrading from existing facilities. Some of them were expansions and some were just a need to establish a new location. None of them were a lateral move or downsizing.

[Operator]

And the next question comes from Blaine Heck with Wells Fargo.

[Blaine Heck, analyst]

Just wanted to get a little bit more color on the Southern California market and some of the trends you're seeing there. Can you just touch on any change in the pace of leasing activity in that overall market over the past quarter? And whether you've seen any notable weakness or strength from specific submarkets, tenant profiles or sizes?

[Peter Baccile, executive]

Jojo?

[Johannson Yap, executive]

Overall, I mean, like we've discussed and I've said Q2 was much more robust than Q1, a lot more transactions. They were comprised of new deals that came that needed to take space quicker on Q2 and some that probably look for deals in Q1, but it has to take space. I would say in terms of size range, the 400,000 square feet and up is very active. And then was less active is about 150,000 to 400,000 that size range. There's quite a bit of supply there. And if we go below 100,000 and that's active again. But that's all the size range.

In terms of markets, in SoCal, like we said, L.A., is very, very -- it's up 4% vacancy. So tenants have fewer choices than if you're any IE and IE West and IE East, both have kind of similar dynamics. If you want to save a little bit more and could get further to your supply chain, you go to IE East; if you want bigger space, you go to IE East and then and so forth in IE West. So our renewal also in our disciplined portfolio shows you that there's a lot of tenants that are renewing in the spaces in our portfolio. We have a high renewal rate kind of tells you that a lot of tenants want to stay put and not moving a lot.

[Blaine Heck, analyst]

Great. That's really helpful color. And then several quarters ago, you guys talked about a few opportunistic acquisitions on development projects that had capital needs where you guys could step in to help with funding. Are you guys seeing any more of those opportunistic or distressed opportunities on the market? Or do you kind of expect those deals to be few and far between?

[Peter Baccile, executive]

Yes. They're few and far between. There's lots of capital. Most of the sponsors are deep-pocket and can weight out along elongated leasing periods. We've done a couple. We're looking. We're making offers, but they are few and far between. There's really no distress.

[Operator]

The next question comes from Vikram Malhotra with Mizuho.

[Vikram Malhotra, analyst]

Sorry if I missed this, but did you comment or give an update on sort of the Federal Mogul lease or the property that I think comes up for or expires next year?

[Peter Baccile, executive]

Peter?

[Peter Schultz, executive]

Vikram, it's Peter Schultz. No, we haven't yet. So that's the 708,000 square foot building in Central PA. You're correct. The lease does expire at the end of March of 2025. We know that they are vacating, so we're marketing the building now. We've seen some preliminary interest there. I would share with you that the mark-to-market is probably in the 40% to 50% range, and we'll keep you up to date on our progress.

[Vikram Malhotra, analyst]

Okay. Great. And then just I wanted to understand the impact of -- leasing has been great, so congratulations -- just the impact on '24 versus obviously, full year '25, all the leasing that you kind of achieved in the second quarter, just roughly do you have -- can you give us a sense of like when does that actually hit FFO?

[Peter Baccile, executive]

Scott?

[Scott Musil, executive]

Vikram, I don't have a calculation of that, so I don't know what the incremental impact is going to be for 2025. But a lot of these leases are second or third quarter start dates that we signed. So quick math, you're going to get a doubling impact in FFO from them in 2025 to '24. That's real quick math though.

[Vikram Malhotra, analyst]

Got it. And then just last one. You mentioned the -- and sorry I joined late, you achieved one renewal in SoCal. There was another one, which I believe there was more variability on that. Can you just remind us sort of where you are in those discussions? And are there any other sort of larger leases that you may be dealing with in the second half where there's more variability?

[Peter Baccile, executive]

Yes. The renewal of the 300,000 foot lease maturity is still in progress. At this point, this renewal is not included in our guidance, and we'll give you an update on our next earnings call.

[Operator]

And the next question comes from Todd Thomas with KeyBanc Capital Markets.

[Todd Thomas, analyst]

Just 2 quick follow-ups. I guess, first on -- regarding the last question, does the 1.2 million square feet of development leasing that's assumed in the fourth quarter, what's the impact that, that leasing has on 2024 guidance? Or are those leases assumed to commence in the fourth quarter? Or will they be mostly 2025 commencements?

[Scott Musil, executive]

Todd, it's Scott. They are assumed to commence in the fourth quarter. So if you assume a mid-fourth quarter start date on all of the leasing in average, the impact to 2024 is about $0.10 per share.

[Todd Thomas, analyst]

Okay. Got it. And then, in terms of the 200 basis point occupancy opportunity that you have from the '23 and '24 developments placed in the service, the 2 leases that you announced in the third quarter, 660,000 that's about 100 basis points, a little bit more, I believe. That's included, I'm assuming. So there's really an incremental 90 to 100 basis points from here? Or is there a 200 basis point opportunity that you see more near term on top of that 660,000 of commencements that you're anticipating?

[Scott Musil, executive]

There's a 200 basis point opportunity, and that opportunity is that 1.2 million square feet of development leasing. Keep in mind, the vast majority of that number is already placed in service. So when it gets leased up, it's going to really positively impact occupancy.

[Operator]

[Operator Instructions] our next question comes from Jessica Zheng with Green Street.

[Jessica Zheng, analyst]

Just wanted to follow up on your IE West versus IE East comment. Do you said leasing dynamics are similar between the 2 sides. Are you seeing one market experiencing greater rent decline than another? Or are they also pretty similar?

[Johannson Yap, executive]

It's not too different. I would say that year-over-year, Q2 '24 and Q2 '23, IE East rent declined 5% more overall, but that's about it, than IE West, I mean.

[Operator]

And the next question comes from Michael Mueller with JPMorgan.

[Michael Mueller, analyst]

Just 2 questions. One, first, I may have missed it, but on the 3Q disposition activity, if you didn't mention a cap rate, can you give us a sense of what that is and the type of buyers? And then as it relates to, I guess, new developments that you could potentially see yourself starting over the next year, 1.5 years or so. Should we be thinking of projects say the size of Houston and smaller for the bias? Or could you see some larger projects as well, do you think?

[Peter Baccile, executive]

I'm going to take the second half of that and then Jojo can talk about the first half. As far as projects, I mean, we have -- we deliver projects and the size of those projects depends on what the market demands. So new developments in South Florida are going to be call it, 60,000 to 200,000 square feet. In Nashville, they could be 300,000 or 400,000 or 500,000 square feet. We have smaller opportunities, for example, in Northern California. Those would be 40,000 or 60,000 square feet. We own land in SoCal, which clearly is not ready in this environment and then you're talking 1 million, 1.4 million. So it ranges based on where it is. It really depends on what the alternatives are for tenants in any given market and what size range that market meets the deepest demand for that market.

[Johannson Yap, executive]

The bulk of the sale is the sale of New Jersey that is a substantial portion if you combine Q2 and what's happened in Q3. And that's the New Jersey portfolio sold at 6.3 cap rate, but the stabilized cap rate is 5.8. And the reason is that just like Peter Schultz mentioned earlier, is that we are going to experience kind of -- the rents have peaked out and potentially the rents are above market. And the cash flow yield on that is a sub-5.

[Operator]

The next question comes from Nick Yulico with Scotiabank.

[Greg McGinniss, analyst]

This is Greg McGinniss on with Nick. So on development, we can appreciate the 7 handle target on development. With where market rents stand today, how much of the land bank could actually be developed to that level? And then what are your plans for Inland Empire land that may no longer make sense given some of the rent declines there?

[Peter Baccile, executive]

Yes. So on average, this is across the whole -- all of our land holdings, you're still about 7% yield. There are some holdings where that yield is in the 5% and those are going to wait, obviously. And with respect to our land in SoCal, we are strongly committed to SoCal. It's the fourth or fifth largest economy in the world. We have -- we are absorbing and digesting space that was overbuilt and overleased because of COVID, and once we work through that, you're going to see that, that market is once again one of the best markets in the country. Don't forget that while we are living through this digestion period, it remains the toughest market in the country to get entitlements. And that's only going to get worse. So that means the value of our holdings will continue to increase. Over time, rents will again rebound and increase and we are excited about the land holdings that we have there.

[Greg McGinniss, analyst]

Okay. And then which markets are you kind of looking to add to the land bank today? And specifically in Southern Florida, where you guys are obviously building more and seems to be one of the strongest markets in the U.S. What have you seen in terms of land pricing over the last year?

[Peter Baccile, executive]

Do you want to talk about the land pricing?

[Peter Schultz, executive]

Sure. Land pricing has come down a little bit, I would say, South Florida, less so. But where we're seeing spec development yields today are generally with 5 handles. Land has not come down as much as rents and costs have come down. Jojo, anything you want to add to that?

[Johannson Yap, executive]

The land pricing has not come down commensurate with the maintenance of yields. Cost of capital has come up. In some cases, rents have flatted or come down and the land has not adjusted. So there is very -- land is still pricey. But like Peter said, the only -- only thing I'll add is that we see developers opportunity for a total return with a 7 handle -- 7 IRRs.

[Greg McGinniss, analyst]

Okay. And just one more question for me on the tenant recovery of operating expenses. They improved meaningfully quarter-over-quarter. And as a percentage of expense was similar to last year despite lower occupancy this year. Was there any seasonal component there or unique items benefiting the quarter?

[Scott Musil, executive]

I think first quarter of '24 had the impact of that equity compensation expense item I spoke about before, that impacts the operating expenses or the property expenses in the portfolio because regional people are included in that as well. So that's probably the vast majority of the improvement of that recovery.

[Greg McGinniss, analyst]

Okay. And then year-over-year, it was basically the same as last year, but with lower occupancy. So I was just trying to see if there's any -- any extra information, we could glean on that also.

[Scott Musil, executive]

Nothing I can think of, Chris?

[Christopher Schneider, executive]

Yes. Possibly in the first quarter, a little bit storm where it is little bit higher, sort of, but I think -- so there's a little bit of seasonality in it. But it is more of what Scott referred to.

[Operator]

And the next question comes from Brendan Lynch with Barclays.

[Brendan Lynch, analyst]

Maybe just to touch on South Florida. It does seem like that is a very strong market for you and your peers. Maybe you could just walk through some of the dynamics, which are causing the increase in demand there.

[Peter Schultz, executive]

I wouldn't say it's an increase in demand. I would say it's consistent demand. Certainly, the ports play a role. The population growth in South Florida plays a role. As you know, it's very land constrained. There's just not a lot of new opportunities in Broward County, where we're starting the smaller building, there's essentially no new construction at all today. So very difficult to get entitlements. They take a long time. The supply constraints to land, keep that market in check, although there's a little bit more supply there today. We continue to see pretty consistent demand.

[Peter Baccile, executive]

Yes. Don't forget geographic -- geographically, you've got the ocean on one side and [ has blades ] on the other in North to South, that market is about 115 miles and East to West is about 21 miles. So you have barriers to entry that are significant.

[Brendan Lynch, analyst]

Great. That's helpful. And you referenced earlier the very narrow aisle racking systems. Can you talk about what percentage of your assets would have similar infrastructure and what the cost is for customers to implement that type of solution? And maybe how that would impact your ability to drive renewal rates when leases roll?

[Johannson Yap, executive]

Yes. Well, VNA, it's a bigger capital investment because that just means more racking. And you do that when you have robotics. And that is a minority part of the market, meaning that it takes a lot of investment to do that, and a lot of users don't need that. In this case, we have a 40 clear building at First Pioneer, and the tenant love the idea of being able to use the cubic potential of that through significant stacking. So we're excited for them. But that's more of a state-of-the-art that's not being used by a lot of tenants in the marketplace.

[Operator]

This concludes our question-and-answer session. I would like to turn the conference over to Peter Baccile for any closing remarks.

[Peter Baccile, executive]

Thank you, operator, and thanks to everyone for participating on the call today. If you have any follow-ups from our call, please reach out to Art, Scott or me. Have a great week.

[Operator]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.